International financial and management accounting lesson 03

50 International Financial and Management Accounting LESSON PREPARATION OF FINAL ACCOUNTS CONTENTS 3.0 Aims and Objectives 3.1 Introduction 3.2 Trading Account 3.2.1 Balancing Process 3.3 Profit & Loss Account 3.4 Balance Sheet 3.4.1 Cash Method of Accounting 3.4.2 Mercantile Method of Accounting 3.5 Let us Sum up 3.6 Lesson End Activity 3.7 Keywords 3.8 Questions for Discussion 3.9 Suggested Readings 3.0 AIMS AND OBJECTIVES In this lesson we shall discuss about final accounts After going through this lesson you will be able to: Analyse trading account Discuss profit and loss account and balance sheet 3.1 INTRODUCTION The preparation of Final accounts the business firm involves two different stages viz Preparation of Accounting and Positional Statements of the enterprise The preparation of Accounting statements involve two different categories viz Trading account and Profit & Loss account The preparation of the positional statement involves only one statement viz Balance sheet In this lesson the accounting statements as well as Balance sheet will be elaborately discussed to the tune of adjustments First the trading account contents and format are discussed to determine the Profit and Loss under the trading account of the business firm, i.e Gross profit Second part of this chapter deals with the preparation of Profit & Loss account in order to determine the operating profit & loss of the enterprise Third part of the chapter involves in the preparation of financial position of the enterprise in terms of Liabilities and Assets 3.2 TRADING ACCOUNT This is first financial statement prepared by the owner of the enterprise to determine the gross profit during the year through the matching concept of accounting The gross profit of the enterprise is calculated through the comparison of purchase expenses, manufacturing expenses, and other direct expenses with the sales It is prepared normally for one year in accordance with accounting period concept i.e., operating cycle of the enterprise which should not exceed 15 months with reference to the Companies Act 1956 Dr Trading Account for the year ended ……………… To Opening Stock To Cash Purchases XXXX Add Credit Purchases XXXX To Total Purchases XXX Less Purchase Return XXX To Net Purchases To Wages To Carriage Inward To Factory lighting To Fuel, Coal, Oil To duty on Import of Materials To Octroi duty To Gross Profit* C/d XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX By Cash Sales XXXX Add Credit Sales XXXX By Total Sales XXXX Less Sales Return XXX By Net Sales By Closing Stock By Gross Loss C/d** Cr XXXX XXXX XXXX 3.2.1 Balancing Process * Gross profit is the resultant of an excess of the credit side total over the total of debit side It means that the gross profit is the excess of incomes in the credit side over the expenses in the debit side Gross Profit = [INCOMES (CREDIT)> EXPENSES(DEBIT)] ** Gross Loss is the outcome of an excess of the debit side total over the total of credit side It means that the gross loss is the excess of expenses in the debit side over the incomes in the credit side Gross Loss = [EXPENSES (DEBIT)> INCOMES(CREDIT)] Illustration 1: (with no opening stock and closing stock) Prepare the trading account for M/s Shan &Co Ltd., for the year ended 31st Mar, 2006 Total Purchases during the year Rs 10, 000 Total Sales during the year Rs 15, 000 In this problem, the Gross profit is simply found by deducting the sales volume from the purchases Gross profit = Sales – Purchases First step open the Trading account for the year ended 31st Mar, 2006 Solution: Trading Account for the ended 31st Mar, 2006 Dr Rs To Purchases 10,000 To Gross profit c/d 5,000* Balancing figure(Rs.15,000-Rs.10,000) Rs To Sales Cr 15,000 *Gross profit Rs 5, 000 is the resultant of excess income over the expenses The total of the credit side more than the debit side total of the trading account Illustration 2: (with Opening stock, various kinds of purchases and sales, Closing stock) From the following information, prepare the trading account for the year ended 31st Mar, 2006 51 Preparation of Final Accounts Rs 4, 000 52 International Financial and Management Accounting Stock on 1st April 2005 (Opening stock) Purchases i Cash purchases ii Credit purchases Sales i Cash sales ii Credit sales Stock on 31st Mar, 2006 (Closing Stock) 20, 000 50, 000 20, 000 60, 000 6, 000 In this problem, the sales and purchases are given in two different categories viz cash and credit The credit and cash purchases and sales of a firm should be added to determine the total volume of purchases and sales made during the year The purpose of crediting the closing stock in the trading account is to find out the materials or goods consumed for trading purposes In order to find out the total amount of goods or materials consumed during a year, three different components to be separately considered Opening Stock Purchases and Closing Stock Opening Stock: It is a stock of goods or raw materials available at the opening of the accounting period, which is nothing but a closing stock of the yester accounting period utilized for trading during the current year Purchases: Purchase of goods or raw materials is either for resale or manufacturing Closing Stock: It is a stock nothing but an outcome of lesser volume of sales than the aggregate of opening stock and purchases Material consumed could be calculated Material consumption=Opening stock + Purchases - Closing stock The closing stock is credited in the trading account in stead of deducting it directly from the aggregate of opening stock and purchases during the year The posting of the closing stock under the credit side of the trading account not only facilitates the firm to find out the consumption during the year as well as reduces the cost of goods sold incurred during the year Solution: Trading Account for the year ended 31st Mar, 2006 Dr To To To To To Rs Opening stock Credit purchases 20,000 Cash purchases 50,000 Total purchases Gross profit c/d 4,000 70,000 12,000 86,000 Rs Cr By Credit sales 20,000 By Cash sales 60,000 By Total sales By Closing stock By Gross profit B/d 80,000 6,000 86,000 12,000 Illustration Prepare trading account of M/s Sundar & Sons as on 31st Mar, 2005 from the following information extracted from the book of accounts Rs Opening stock on 1st April 12004 Purchases Cash 50, 000 1, 20, 000 Contd Credit 1, 00, 000 53 Preparation of Final Accounts Sales Cash Credit Purchase Returns Carriage Inwards Marine insurance on purchase Other direct expenses Sales Returns Stock as on 31st Mar, 2005 40, 000 1, 00, 000 20, 000 10, 000 6, 000 4, 000 30, 000 10, 000 In this problem, Return outwards and inwards are given in addition to cash and credit purchases and sales of a firm to find out the Net purchases and the Net sales of the firm Net Sales = Cash Sales + Credit Sales - Sales Returns Net Purchases = Cash Purchases + Credit Purchases - Purchase Returns Solution: Trading Account for the year ended 31st Mar, 2005 Dr Rs To opening stock To Cash Purchaes 1,20,000 Add: Credit purchase 1,00,000 To total purchase 2,20,000 Less: Purchase Return 20,000 To Net Purchase To carriage Inwards To Marine Insurance To other direct expenses To Gross Loss b/d 50,000 2,00,000 10,000 6,000 4,000 2,70,000 Rs By Cash sales 40,000 Add:Credit Sales 1,00,000 By total Sales 1,40,000 Less: Sales Return 30,000 By Net Sales By Closing stock By Gross Loss c/d Cr 1,10,000 10,000 1,50,000 2,70,000 1,50,000 Gross Loss is due to an excess of the debit side total over the credit side total 3.3 PROFIT & LOSS ACCOUNT It is a second statement of accounting in connection with the earlier to determine the Net profit/loss of the enterprise out of the early found Gross profit/loss This is an accounting statement matches the administrative, selling and distribution expenses with the gross profit and other incomes of the enterprise This is an account prepared for one operating cycle of the firm i.e 12 months in period The transactions are recorded in accordance with golden rules of nominal account In the profit & loss account, the expenses and losses are debited and incomes and gains are credited The reason for bringing down the gross loss /gross profit of the trading account into the debit and credit side of Profit & Loss A/c respectively, are only to the tune of nominal accounting ruling with reference to debit all expenses and losses and credit all incomes and gains The expenses which are matched with the credit total of the profit and loss account Classified into various categories i Administrative Expenses ii Selling & Distribution Expenses 54 iii Financial Expenses International Financial and Management Accounting iv Legal Expense Profit and Loss Account for the year ended……………… Dr To Gross Loss B/d Balancing figure Office and Administrative Expenses To Salaries To Rent , Rates and Taxes To Office Lighitng To Printing and Stationery To Insurance premium To postage To General expenses To miscellaneous expenses Selling and Distribution Expenses To Salary to sales staff To commission charges To Advertising expenses To Carriage outward To Bad debts To Packing expenses Financial Expenses To interest on capital To interest on loans To trade discount allowed To cash discount allowed Maintenance Expenses To Depreciation on Fixed assets Rs XXXX Rs Cr By Gross Profit B/d XXXX By Rent received By commission received By interest on drawings By interest on investments By trade discount received By cash discount received To Repairs and maintenance of Productive assets To loss on sale of assets Other Expenses To Provision for debts To Net profit c/d* To profit on sale of assets By Net loss c/d** The balancing process of the profit and loss account leads to two different categories *Net profit is the resultant of excess of income in the credit side over the expenses in the debit side of the Profit and Loss account ** Net Loss is an outcome of excess of expenses in the debit side over the incomes in the credit side Illustration From the following information, Prepare the Profit and Loss account Gross profit from the trading account Manager Salary Office lighting Debit Credit Rs Rs 1, 00, 000 30, 000 5, 000 Office Rent 15, 000 Local Taxes 1, 000 Salary paid to salesmen 20, 000 Contd Commission charges paid 55 10, 000 Legal charges paid 3, 000 Bad debts 1, 500 Advertising charges Preparation of Final Accounts 25, 000 Package charges 7, 500 Discount allowed 3, 000 Discount received 4, 000 Dividend received 2, 000 Rent received 1, 000 Depreciation charges 10, 000 Repairs and Maintenance 2, 500 Interest on loans 1, 500 500 Solution: Profit and Loss account for the year ended …………………………… Dr Rs To Manager Salary To Office lighting To Office Rent To Salary paid salesman To commission charges To Legal charges To Bad debts To Advertising charges To Package charges To Depreciation charges To Repairs and maintenance To Interest on loan To Local taxes 30,000 5,000 15,000 20,000 10,000 3,000 1,500 25,000 7,500 10,000 2,500 1,500 1000 1,32,000 Rs By Gross profit B/d By Discount received By Dividend received By Rent received By Interest received By Net Loss c/d* Cr 1,00,000 4,000 2,000 1,000 500 24,500 1,32,000 * Net loss is the excess of the expenses total in the debit side Rs 24,500 over the incomes total in the credit side of the profit and loss account 3.4 BALANCE SHEET Balance sheet is the third financial statement which reveals the financial status of the enterprise through the total amount of resources raised and applied in the form of assets This is the fundamental statement of the firm which explores the firm financial stature through the resources mobilized and investments applied i.e Liabilities and Assets respectively From the early, according to double entry concept or Duality concept, the balance sheet can be divided into two distinct sides, known as liabilities and assets The balance sheet can be disclosed in two different orders (i) in the order of long lastingness - permanence (ii) in the order of liquidity Proforma Balance Sheet as on dated…………………… (In the order of Long lastingness) 56 Liabilities Capital XXXX Less: Drawings XXX Add: Net profit XXXX International Financial and Management Accounting Rs Long-term borrowings Sundry creditor Bills payable Bank overdraft Outstanding expenses Pre received income XXXX XXXX XXX XXX XXX XXX XXX Total liabilities XXXX Total liabilities XXXX Assets Land & Building Plant & Machinery Furniture& fittings Fixtures& tools Marketable securities Closing stock Sundry debtors Bills receivable Pre paid expenses Cash at Bank Cash in hand Total Assets Cash in hand Total Assets Rs XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX The downward arrow shows the order/arrangement of the assets and liabilities on the basis of permanence or long lastingness The upward arrow shows the order/arrangement of the assets and liabilities on the basis of liquidity Methods of determining the accounting income includes: i Cash method of accounting ii Mercantile method of accounting 3.4.1 Cash Method of Accounting Under this method, cash receipts are matched with the cash payments irrespective of the time period in order to determine the income 3.4.2 Mercantile Method of Accounting Under this method, time period is given greater importance than the actual receipts and payments It records the receipts and expenses pertaining to the specified period whether them are actually received /paid or not The receipts as well as payments of the other periods should be ignored /eliminated in determining the income of the stipulated duration It is popularly known in other words as "Accrual Accounting System" Next stage is to classify the types of income of the enterprise: To determine income of the business, what should be in character ? Either in accounting income or taxable income Taxable income can be computed from the transactions of the enterprise but they are subject to frequent modifications on the tax provisions from one year to another year This cannot be uniquely found out unlike the accounting income The accounting income should have to be found out only to the tune of accounting principles and concepts The process of final accounts diagram is illustrated in the next page for easier understanding not only to adopt the mercantile system of accounting but also to implement the duality principle of accounting throughout the transactions Adjustment entries The adjustment entries are classified into three segments viz on expenses, incomes and others On expenses The adjustment entries on expense can be classified into two categories (i) Outstanding Expenses: These are incurred expenses but not paid in cash E.g Rent of the office is Rs 22, 000 for 11 months only The enterprise has failed to remit the payment of last month rent amounted Rs 2, 000 According to mercantile system of accounting, the rent of the office, whether fully paid or not, it should be totally considered for the entire duration to determine the income of the enterprise Finally, what is to be done ? The amount of actual rental should be added with the rent which has not been paid by the enterprise i-e (Rs 22, 000+Rs 2, 000 = Rs 24,000) Treatment of the transaction Debit the expense account Credit the liability i.e of the person to whom the amount to be paid Profit &Loss A/c:- Add the outstanding amount with the total expenses already paid Balance sheet:-Include it as an item of responsibility under the liabilities side (ii) Prepaid expenses: Normally, some of the expenses paid for availing the services are not fully extracted during the term; which left / unused should be normally carried forward to the next term It means that the expense which is paid in advance to make use of the service for forthcoming period to whom is known as debtor; the person who keeps the money of the enterprise for the definite duration is nothing but an asset Debit the asset - Advance payment for service Credit the expense Profit &Loss A/c:- Deduct the prepaid amount from the total expenses already paid Balance sheet:-Include it as an item of application under the assets side Next major segment in the adjustment entry is on Incomes Income Outstanding Perceived Income (iii) Income outstanding: It happens during the enterprise then and there ; which means income earned but not received It happens in the case of certain income of dividend on shares, interest on loans granted not yet received The income earned but not received is also an income that should be credited in the income account to know the total volume of the income pertaining to the accounting period The income earned but not received is nothing but an asset not yet received The income not yet received from whom should be debited as an asset due to the enterprises' money income with the other person/institution Profit &Loss A/c:- Add the income outstanding amount to the total incomes already received Balance sheet:-Include it as an item of unrealized income under the assets side i.e the firms’ money with the others (iv) Income received in advance: Any income received in advance cannot be considered as an income which should be calculated and deducted from the total income received; known as advance receipt It is the income of the other period; should be eliminated from the income received in accordance with the mercantilist 57 Preparation of Final Accounts 58 accounting system in determining the income The income which is received in advance pertaining to the period of non rendered service should removed from the total income received, in order to determine the original income of the period should be known exactly The amount received in advance of non rendered service is the responsibility to return nothing but the liability of the firm International Financial and Management Accounting Debit the Income account Credit the Income received in advance - Liability of the balance sheet Profit &Loss A/c:- Deduct the Income received in advance from the total incomes which were already received Balance sheet:-Include it as an item of responsibility for non rendered service under the liabilities side (v) Bad debts: Bad debts is the result of credit sales which only due to the inability of customers/consumers to settle the overdue The inability may be due to poor repaying capacity or insolvent during the moment of the sales The bad debt due to the inability cannot be deducted from the sales volume which was already transacted The debts cannot be recovered has to be treated as a loss of the firm Debit all losses of the firm The losses due to bad debts should be appropriately effected as well as adjusted in the individuals' account i.e in the consumers' account who received the goods on credit Profit &Loss A/c:- Non recovery of credit sales is deemed to be a losses – should be debited to Profit & Loss A/c Balance sheet:-Non recovery of credit sales should be deducted from the volume of credit sales transacted by the firm under the Assets side in order to determine the original amount of credit outstanding Check Your Progress The income received in advance is (a) Asset of the enterprise (b) Income of the enterprise (c) Liability of the enterprise (d) Expense of the enterprise The depreciation charge is only to the tune of (a) Convention of consistency (b) Time period concept (c) Business entity concept (d) Convention of conservatism The value of the asset shown in the balance sheet is (a) Book Value (b) Market value (c) Realisable value (d) Original value Rent paid in advance is to be effected (a) Deduct the amount from the Original rent paid – P&L A/c (b) Include the rent paid in advance as an item of current asset- Balance sheet (c) Deduct the rent paid in advance in the Trading A/c (d) Both (a) & (b) Illustration 59 From the following information extracted from the books of Jain & Co, Prepare Trading, Profit & Loss A/c for the year ended and Balance sheet as on that date Particulars Purchase Sales Return inward Stock 1.1.96 Drawing Building Machinery Furniture Debtors Wages Carriage inwards Rent and Rates Bad debts Cash Investment Postages Insurance Return outwards Capital Creditors Interest Commission Provision Bad debts Bank O/d Salaries Total Debit Rs 90,300 Credit Rs 1,37,200 2,200 40,000 5,000 30,000 20,000 8,000 25,000 3,000 2,000 1,500 1,000 3,500 10,000 2,500 2,000 1,300 50,000 24,000 500 3,250 750 40,000 11,000 2,57,000 2,57,000 Additional Information: Value of the stock on 31.12.96 Rs 65,000 Goods worth Rs 800 for his personal use of the proprietor Rs 400 of insurance paid is nothing but advance payment Salary Rs 1000 for the month of Dec 1996 has not yet paid outstanding Charge depreciation a Building 2% per annum b Machinery 10% per annum c Furniture 15% per annum Maintain provision for doubtful debts @ 5% on sundry debtors Trading and Profit & Loss Account of Jain & Co for the year ended 1995-96 Solution: Dr Rs To Opening stock To Purchases Rs 40,000 90,300 (-)Purchase Return 1,300 (-) Goods taken by proprietor 800 Rs By Sales (-) Return Inward Rs Cr 1,37,200 2,200 1,35,000 By Closing Stock 65,000 Contd Preparation of Final Accounts 60 To Net purchases International Financial and Management Accounting To Wages 88,200 3,000 To Carriage inward 2,000 To Gross Profit c/d (Balancing figure) 66,800 2,00,000 2,00,000 To Rent & Rates 1,500 By Gross profit B/d To Bad Debts 1000 By Commission 2,500 By Interest To Postages To Insurance 66,800 3,250 500 2,000 (-) Prepaid 400 To Salaries 11,000 1,600 (+)O/s of Salary 1,000 12,000 To New Provision 5% on Sundry DebtorsRs.25,000 (-)Old Provision 1,250 750 500 To Depreciation Building 2% 600 Machinery 10% 2,000 Furniture15% 1,200 To Net profit c/d (Balancing figure) 3,800 47,650 70,550 70,550 Balance Sheet as on 31st Dec, 1996 Liabilities Capital (+)Net Profit transferred from P&L Account (-)Drawings Cash + Goods Rs5000+Rs.800 Bank OD Creditors Salary O/s Rs 50,000 47,650 Rs Assets Building (-)Depreciation 2% Rs 30,000 600 Rs 29,400 5,800 91,850 40,000 24,000 1,000 Machinery (-)Depreciation 10% 20,000 2,000 Furniture (-)Depreciation 15% 8,000 1,200 18,000 6,800 Debtors (-)Provision Investment Closing stock Prepaid Insurance Cash in hand 1,56,850 25,000 1,250 23,750 10,000 65,000 400 3,500 1,56,850 Illustration 61 From the following information drawn from the books of M/s Sundaran & Co Prepare Trading, Profit & Loss account for the year ended 31st Mar, 2004 and Balance sheet as on dated: Particulars Sundaran’s Capital Sundaran’s Drawings Plant and Machinery Balance on 1st April 2003 Plant and machinery additions on 1st Oct,2003 Stock opening Purchases Return Inwards Sundry debtors Furniture & Fixture Freight duty Rent Rate and Taxes Printing stationery Trade expenses Sundry creditors Sales Return outwards Postage & Telegsundaram Provision for bad debts Discounts Rent of the premises sub let for the year upto 30th Sept2004 Insurance charge Salaries & wages Cash in hand Cash at bank Carriage outwards Total Debit (Rs.) Credit (Rs.) 1,81,000 36,000 1,20,000 25,000 95,000 7,82,000 12,000 20,600 15,000 2,000 24,600 3,800 5,400 40,000 9,80,000 3,000 800 400 1,800 7,200 2,700 31,300 6,200 30,500 500 12,13,400 12,13,400 Additional Information Stock on 31st Mar, 2004 Rs 94, 600 Write off Rs 600 as bad debts Provision for doubtful debts 5%on debtors Create a provision on for discount on debtors & Reserve for creditors 2% Provide a depreciation on furniture and fixture at 5% per @ Plant machinery depreciation 20% Insurance unexpired Rs 100 A fire occurred on 25th Mar 2004 in God own and the stock of the value of the 5000 destroyed fully insured the insurance admitted claim fully yet to be paid Solution: Trading account M/s Sundaran &Co for the year ended 2003-04 Dr To opening stock To Purchase (-)Returns To Net purchases Freight Duty To Gross Profitc/d Rs Rs 95,000 7,82,000 3000 7,79,000 2,000 1,91,600 10,67,600 Rs By sales (-) Return Closing stock Goods destroyed by fire 9,80,000 12,000 Rs Cr 9,68,000 94,600 5,000 10,67,600 Preparation of Final Accounts 62 International Financial and Management Accounting Profit & Loss Account of M/s Sundaran &Co for the year ended 2003-04 Dr Rs Rs To Carriage Outwards To painting & stationery Trade expenses Postage and telegram (-) unexpired Rs By Gross profit B/d 500 Transferred from trading account 24,600 By discount To rent, rate and taxes Insurance charge Rs Cr 1,91,600 1,800 3,800 By Rent of Sublet 7,200 5,400 (-) Advance receipt rent of sublet for months:7,200/12 monts= Rs.600 P.M For months 3,600 800 3,600 2,700 By 2% reserve on sundry creditors 800 100 2,600 Salaries and wages ToDepreciation Furniture and Fixture @5% on Rs.15,000 Plant and machinery 1st April 2003@20% on Rs.1,20,000 (12 months) Plant and machinery 1st Oct,2003 @20% on Rs.25,000(6 months) 31,300 750 24,000 2,500 26,500 To Bad debts write off 600 To New provision 1000 (-)Old provision 400 To provision to be created To discount on debtors 2% To Net profit c/d Transferred to Balance sheet 600 380 99,970 1,97,800 1,97,800 Balance sheet of M/s Sundaran &Co as on dated 31st Mar, 2004 Rs Liabilities Capital (+)Net profit (-)Drawings Sundry creditors (-)2% Reserve Pre received rental income Rs Assets 1,81,000 Furniture & fixture Depreciation @ 5% 99,970 36,000 2,44,970 Plant Machinery 40,000 Depreciation @ 20% 800 39,200 Plant Machinery 3,600 Depreciation @20% for months Closing stock Insurance unexpired Sundry debtors Goods fire –insurance Cash at bank Cash in hand 2,87,770 Rs 15,000 750 1,20,000 24,000 25,000 2,500 Rs 14,250 96,000 22,500 94,600 100 18,620 5,000 30,500 6,200 2,87,770 Illustration From the following figures extracted from the books of M/s Amal &Vimal 31st Mar, 02 Particulars Opening stock Purchases Sales Building Wages Carriage inwards Bills payable Furniture Salaries Advertisement Coal and coke Cash at bank Pre paid wages Depreciation fund investment Machinery at cost(Rs.10,000 New) Sundry debtors Bad debts Depreciation fund Sundry creditors Rent rate and taxes Trade expense Capital Debit(Rs) 30,000 1,10,000 Credit (Rs) 2,50,000 55,000 23,000 3,000 10,000 9000 42,000 24,000 2,000 14,000 1,000 25,000 60,000 20,000 3,000 25,000 24,000 4,000 4000 Amal Vimal 50,000 40,000 Petty expenses Provision for doubtful debts Gas and water Cash in hand Outstanding rent 4,000 1,000 1,200 800 400 Bank loan 4,35,000 34,600 4,35,000 Adjustment entries: a The partners share profit and losses Amal 2/5 and Vimal 3/5 b closing stock Rs 15,000 c stock valued at Rs 10,000 was destroyed by fire but insurance company admitted a claim of 8, 500 only and the claim is not yet paid d Wages include Rs 2,000 for installation of anew machinery on 1st Dec., 2005 e Depreciate the machinery at 10% per annum Solution: Trading account of M/sVimal & Amal & Co for the year ended 2001-02 Dr To opening stock To purchases To wages (-)Erection To Coal and coke To Gas and water To Carriage inwards To Gross profitc/d Rs Rs 30,000 1,10,000 23,000 2,000 21,000 2,000 1,200 3,000 1,07,800 2,75,000 Rs By sales By closing stock By goods destroyed Rs Cr 2,50,000 15,000 10,000 2,75,000 63 Preparation of Final Accounts 64 International Financial and Management Accounting Profit & Loss account of M/s Vimal& Amal &Co for the year ended 2001-02 Dr Rs Rs To Salaries 42,000 To Advertisement To Bad debts To Trade expenses To Rent, rates & Taxes To Depreciation(d) To Insurance Loss Admitted claim 24,000 3,000 4,000 4,000 5,400 Rs Rs Cr By Gross profit B/d 1,07,800 Total 1,07,800 10,000 8,500 1,500 4,000 To petty expenses To Net profit Amal Vimal 17,960 11,940 19,900 1,07,800 Total Balance sheet of M/s Vimal & Amal &Co as on dated 31st Mar, 2002 Liabilities Capital Amal (+) Net profit Rs 50,000 7,960 Rs 57,960 Capital Vimal (+) Net profit Depreciation fund Bank loan Sundry creditors Outstanding rent Bills payable 40,000 11,940 51,940 25,000 34,600 24,000 400 10,000 Assets Depreciation investment Plant and Machinery (-) Depreciation Furniture Building Closing stock Sundry debtors Provision for bad debts Out standing Insurance claim Pre paid wages Cash at bank Cash in hand 2,03,900 Rs 62,000 5,400 20,000 1000 Rs 25,000 56,600 9,000 55,000 15,000 19,000 8,500 1000 14,000 800 2,03,900 SS Jain Bros for the year ended 31st Dec., 2003 Particulars Capital Drawings Buildings Furniture and fittings Depreciation on Reserve Buildings Furniture Depreciation for the year Purchases Sundry creditors Sales Debtors Establishment charges Electricity charges Postage and telegram Travelling and conveyance Advance for sales commission Insurance Rent received Motor van (purchased 1.1.03) Motor van maintenance Fixed deposit (1.9.2003) Cash in hand Cash at bank Debit (Rs) Credit (Rs) 6,00,000 12,000 2,00,000 30,000 10,000 3,000 13,000 4,00,000 40,000 5,00,000 1,20,000 20,000 6,575 1,284 3,816 1,000 2,500 12,000 80,000 23,425 1,00,000 1,823 1,47,977 Due to the difference in the trial balance, an examination of the goods was conducted which reveals following errors Rs 25 paid to the conveyance was debited to motor van maintenance account Rs 2, 000 drawn from bank towards for establishment charges was omitted to posted in to ledger Cash column in the cash book on the receipt side stands excess total by Rs 400 Adjustment entries: a Establishment of charges have been paid only up to Nov & provision of Rs 2, 000 has to be made for Dec b Electricity charges are O/s Rs 25 c (½) commission on total sales is payable to salesmen, towards which Rs 1000 as paid in advance d Fixed deposit earns interest at 9% per annum e Provide depreciation 20% per annum on motor car f Closing stock 31st Dec., 2003 To prepare the trial balance, the following necessary corrections should be made on the respective accounting heads given I Rs 25 paid to the conveyance was debited to motor van maintenance accountThe errors to be rectified which is known as error without affecting the trial balance Rs 25 should be deducted from the Motor maintenance account for the wrong entry debited already but at the same time right entry has to be made under the conveyance account through the addition of Rs 25 i.e., Rs 25 to be debited To put it in to nutshell, Rs 25 should be deducted from the total of Motor maintenance account in order to cancel the wrong debit entry i.e Rs 23,425-Rs 25=Rs 23,400 To effect the correct entry, Rs 25 should be to the original conveyance account i.e Rs 3, 816+Rs 25= Rs 3,841/- II Rs 2, 000 was drawn from the bank omitted in the establishment charges account; which is meant for the purpose Rs 2, 000 should be added to the establishment charges account total in order to identify the total of establishment charges Total establishment charges = Rs 22,000+ Rs 2000= Rs 24,000 III Cash column in the cash book on the receipt side excess total Rs 400 i.e Rs 400 excess total should corrected on the given balance of cash in hand in order to determine the real volume of cash in hand Real volume of cash in hand = Rs 1,823-Rs 400 = Rs, 1423 Now we have to illustrate the corrected trial balance by incorporating the above given changes 65 Preparation of Final Accounts Trial Balance 66 International Financial and Management Accounting Particulars Capital Drawings Buildings Furniture & Fittings Depreciation Reserve Purchases Sundry creditors Sales Debtors Establishment charges Rs.20,000 Electricity charges Postage & telegram Traveling& Conveyance Advance for salesmen commission Insurance Rent received Motor van (purchased 1.1.2003 Motor van maintenance Fixed deposit Cash in hand Cash at bank Depreciation Total Debit Rs Credit Rs 6,00,000 12,000 30,000 13,000 4,00,000 40,000 5,00,000 1,20,000 22,000 6,575 1,284 3,841 1,000 2,500 12,000 80,000 23,400 1,00,000 1,423 1,47,977 13,000 11,65,000 11,65,000 Trading account for the year ended 31st Dec, 2003 Rs To Purchases To Gross profit c/d Rs 4,00,000 2,00,000 6,00,000 Rs By Sales By Closing stock Rs 5,00,000 1,00,000 6,00,000 Profit & Loss account for the year ended 31st Dec, 2003 To Insurance To motor maintenance To establishment charge Dec provision To Traveling & conveyance To Postage and telegram To electricity charges O/s E.B charges To depreciation To sales commission paid To commission O/s To Depreciation of motor van @ 20% To Net profit c/d 2,500 23,400 22,000 By Gross profit b/d By Rent received Interest received 2,00,000 12,000 3,000 2,000 24,000 3,841 1,284 6,575 25 6,600 13,000 1,000 1,500 2,500 16,000 1,21,875 2,15,000 2,15,000 Balance sheet as on dated 31st Dec, 2003 67 Preparation of Final Accounts Liablities Capital (+)Net profit (-)Drawings Sundry creditors Provision for establishment charges Electrical charges O/s Commission Rs 6,00,000 1,21,875 7,21,875 12,000 Rs 7,09,875 40,000 2,000 25 1,500 Assets Cash in hand Cash at bank Fixed Deposit Interest Motor van Sundry debtors Rs Building (-)Reserve Furniture (-) Reserve Closing stock Rs 1,423 1,47,977 1,00,000 3,000 64,000 1,20,000 2,00,000 10,000 30,000 3,000 1,90,000 27,000 1,00,000 7,53,400 7,53,400 Pandit Brothers for the year ended 31st Mar, 2006 Capital Drawings Particulars A.Pandit B.Pandit A Pandit B.Pandit Buildings Furniture & fittings Purchases Sales Stock 1.4.2005 Wages & salaries Rates & Taxes Office expenses Sundry debtors Sundry creditors Cash in hand Cash at Bank O/D Freight inwards Total Debit (Rs) Credit (Rs) 1,00,000 1,00,000 16,000 16,000 80,000 20,000 2,00,000 3,00,000 50,000 44,000 1,600 60,000 25,000 12,000 400 29,000 28,000 5,41,000 5,41,000 Adjustment: a Closing stock Rs 1, 14, 500 b There was fire in the premises on 25th Nov, 2005, which damaged the portion of the stock the loss was estimated Rs 17,500 c A Pandit is the in-charge of purchases of stock item & he is to be paid 5% on such purchases d A steel table purchased 1st Feb Rs 3, 000 debited to purchase account e B Pandit who looks after all aspect other than purchases is entitled to the commission of 5% on Net profits of after charging commission f Depreciation is to be charged at 5% per annum on building & 10% on furniture fittings profits or losses or share equally for the partners 68 International Financial and Management Accounting Trading account for the year ended 2005-06 Dr To Opening Stock Purchases (-)Purchase of table Rs 50,000 2,00,000 3,000 (+)Commission to A.Pandit 1,97,000 4,925 Rs Cr 3,00,000 1,14,500 17,500 By Sales By Closing stock By Goods Loss by fire 2,01,925 28,000 44,000 1,08,075 To Carriage inwards To Wages & Salary To Gross profit c/ d Total 4,32,000 Total 4,32,000 Profit & Loss account for the ended 2005-06 Dr Cr To Rates & Taxes 1,600 To office expenses 60,000 To Depreciation Building By Gross profit b/d 1,08,075 2,000 To Depreciation Existing Furniture 20,000×10/100 New Furniture 3000×10/100×2/12 2,000 50 2050 To Loss on fire 17,500 To commission B.Pandit To Net profit C/d A.Pandit B.Pandit 1187 11,869 11,869 23,738 1,08,075 1,08,075 Balance sheet as on dated 31st Mar, 2006 Liabilities 1,00,000 4,925 1,04,925 (+)Net profit 11,869 1,16,794 (-)Drawings 16,000 Capital( B.Pandit) 1,00,000 (+)Commission 1,187 1,01,187 (+) Net profit 11,869 1,13,056 (-)Drawings 16,000 Bank overdraft Sundry creditors Capital(A.Pandit) (+) Commission Building Depreciation 2.5% Assets 80,0000 2,000 78,000 1,00,794 97,056 29,000 12,000 2,38,850 Furniture Depreciation 10% Closing stock Sundry Debtors Cash in hand 23,000 2,050 20,950 1,14,500 25,000 400 2,38,850 3.5 LET US SUM UP Trading Account is first financial statement prepared by the owner of the enterprise to determine the gross profit during the year through the matching concept of accounting The purpose of crediting the closing stock in the trading account is to find out the materials or goods consumed for trading purposes In order to find out the total amount of goods or materials consumed during a year, three different components to be separately considered Opening stock Purchases and Closing Stock Profit & Loss Account is a second statement of accounting in connection with the earlier to determine the Net profit/loss of the enterprise out of the early found Gross profit/loss Balance sheet is the third financial statement which reveals the financial status of the enterprise through the total amount of resources raised and applied in the form of assets 3.6 LESSON END ACTIVITY If it is uncertain whether an expenditure will benefit one or more than one accounting period, or whether it will increase the capacity or useful life of an operational asset, most firms will expense rather than capitalise the expenditure Why? 3.7 KEYWORDS Trading account: It is the accounting statement of revenues and expenses Balance Sheet: It is nothing but a positional statement of assets and liabilities of the firm on a particular date G.P Gross profit: Resultant of excess of trading incomes over the expenses G.L Gross Loss: Resultant of excess of trading expenses over the incomes/ revenues N.P Net profit: Resultant of excess of Profit & Loss incomes /revenues over the expenses N L-Net Loss: Resultant of excess of Profit & Loss expenses over the incomes 3.8 QUESTIONS FOR DISCUSSION Illustrate the interrelationship in between the accounting statements and statement of position Highlight the effect of the following entries in the (a) Closing stock (b) Interest received in advance (c) Rent outstanding Explain the various accounting concepts and conventions through additional information or adjustments Illustrate various kinds of drawing and their treatment in the financial statements Check Your Progress: Model Answers c, a, a, b 69 Preparation of Final Accounts 70 International Financial and Management Accounting 3.9 SUGGESTED READINGS M P Pandikumar “Accounting & Finance for Managers”, Excel Books, New Delhi R L Gupta and Radhaswamy, “Advanced Accountancy” V K Goyal, “Financial Accounting”, Excel Books, New Delhi Khan and Jain, “Management Accounting” S N Maheswari, “Management Accounting” S Bhat, “Financial Management”, Excel Books, New Delhi Prasanna Chandra, “Financial Management – Theory and Practice”, Tata McGraw Hill, New Delhi (1994) I M Pandey, “Financial Management”, Vikas Publishing, New Delhi Nitin Balwani, “Accounting & Finance for Managers”, Excel Books, New Delhi  ... ? ?Financial Accounting? ??, Excel Books, New Delhi Khan and Jain, ? ?Management Accounting? ?? S N Maheswari, ? ?Management Accounting? ?? S Bhat, ? ?Financial Management? ??, Excel Books, New Delhi Prasanna Chandra,... Final Accounts 70 International Financial and Management Accounting 3.9 SUGGESTED READINGS M P Pandikumar ? ?Accounting & Finance for Managers”, Excel Books, New Delhi R L Gupta and Radhaswamy, “Advanced... 54 iii Financial Expenses International Financial and Management Accounting iv Legal Expense Profit and Loss Account for the year ended……………… Dr To Gross Loss B/d Balancing figure Office and Administrative